There are times when I'd like to share something with you but my Voice in the Gardensite does not seem the appropriate place, thus, this blog.

There are experiences, thoughts, views... and for anyone lurking/waiting to pounce (as has occurred on several occasions), please do not attempt to turn what I post into a political statement. This is NOT a political site, but IS about occurrences, reality, and personal opinion concerning what I see in the world around me and my family. There are many excellent writers whose works "speak" to me, and I shall include some of them. At times it may be something I think you would enjoy or simply whatever ails you (me).~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.

Wednesday, July 4, 2012

In June of each year the Social Security Trust Fund (SSTF) reinvests a
significant portion of its investment portfolio in newly issued Special
Issue Treasury Securities. The interest rates on these bonds is set by a
formula that was established in 1960. The formula was designed to
insulate the SSTF from transitory changes in interest rates by averaging
market based bond yields over a three-year period.

Bernanke’s Fed has set interest rates at zero the past four years. In
2012 the 1960's formula has finally caught up with the SSTF. It got
murdered on this year's rollover.

The following is from the SSA (link).
It shows what has matured this year and what new investments have been
made. I will be breaking down sections of this report, so don’t get eye
strain looking at this:

Consider the bonds that matured in 2012:

$135 billion of old bonds matured this year. This money was rolled over
into new bonds with a yield of only 1.375%. The average yield on the
maturing securities was 5.64%. The drop in yield on the new securities
lowers SSA's income by $5.7B annually. Over the fifteen year term of the
investments, that comes to a lumpy $86 billion. It gets worse.

Bernanke has pledged that he will keep interest at zero for a minimum of
another two years. The formula used to set interest rates for SSA looks
back over the prior three years. Therefore, SSA will be stuck with a
terrible return on its investments until at least 2017.

I anticipate that the formula will result in still lower investment
returns for the next five years, but I’ll conservatively use the rates
set this year to evaluate the consequences to SSA. The following looks
at what is maturing at SSA:

A total of $543 billion of securities with an average yield of 5.6% is
coming due in the existing ZIRP window. The reduction in income from the
4.2% drop in yield translates to a nifty $23 billion a year, for
fifteen years ($350b). It gets worse.

As a result of the Fed’s extended ZIRP policy, and the SSA's interest
rate setting formula, it is now a certainty that interest income at SSA
is going to substantially drop over the coming decade. The problem is
that SSA has provided projections for its interest income over this time
period that don’t jive with this reality. From the 2012 SSA report to
Congress:

The SSTF believes it will earn an average of 4% over this period. That
is not possible any longer. I calculate that the most SSA could earn is
an average of 2.3% (it could be significantly lower). The drop in yield
translates to a reduction in income of $535B over the forecast period.
That’s a lot of dollars.

Consider again the base case provided by SSA in April. The following
compares the size of the trust fund based on SSA’s estimates and my
adjustments for what interest income will be (everything else is
constant).

Based
on a realistic assessment of interest income at SSA, the trust fund
tops out in 2015, its peak value will be ~$2.823B. The SSTF has reported
that the TF will top out at $3,061B, and that milestone will not be
reached until 2021. Essentially, the train wreck will happen six years
earlier then assumed, and the TF will be $250B short. It gets worse.

The other key ingredients in the SS "pie" are tax receipts from workers
and the amount of monthly benefit payments (the assumptions used is that
GDP growth will average 4%, and unemployment falls to 5.5% - no
recessions over the ten-year horizon). These are not realistic
assumptions. This means that once the SSTF hits its peak in 2015, the
run off in assets will happen very quickly.

The SSTF has stated that the date in which the TF falls to zero will be
2033. The actual termination date of the TF is much closer than that. It could come as early as 2023.

Anyone who is 55 or older should be worried about this. Based on current
law, all SS benefit payments must be cut by (approximately) 25% when
the TF is exhausted. This will affect 72 million people. The economic
consequences will be severe. The drop in SS transfers translates into a
permanent drag on GDP of 2%. In other words, when this happens, the
country will be unable to have any significant positive growth for a
long time to come.

I know I will get comments from readers who have worked 40 years and
paid into SS and now want it back. I tell those folks in advance that
I'm sorry, but they will have to accept a cut in benefits. It will
happen it about ten-years. Make your plans accordingly. If you don’t
like these conclusions, write a letter to Bernanke. It’s well past time
that the true consequences of his monetary policies are understood.
He’s not just breaking the backs of small savers; he’s killing Social
Security.